Offiical Assignee v Smith

[2013] NZHC 3217

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-488-209 [2013] NZHC 3217

BETWEEN  OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF MICHAEL OWEN PERKINS

Plaintiff

ANDJANET MARY SMITH First Defendant

ANDMICHAEL PERKINS Second Defendant

ANDOLIVER PERKINS Third Defendant

Hearing:                   27 November 2013

Counsel:                  GAD Neil for Plaintiff

No appearance for Defendants

Judgment:                29 November 2013

JUDGMENT OF PANCKHURST J

Introduction

[1]      On 27 November 2013 I heard submissions in the context of a formal proof hearing of this proceeding.  The Official Assignee sues in relation to the estate of Michael Perkins, in his personal capacity.   Michael Perkins is also the second defendant  in  the  proceeding,  but  in  his  trustee capacity.    Janet  Smith,  the  first defendant  is  Mr  Perkins’  partner  and  Oliver  Perkins,  the  third  defendant,  is Mr Perkins’ son.

[2]      The Official Assignee obtained a default judgment against Ms Smith in her capacity as a trustee of the Bay of Islands Trust (the Trust).  The statement of claim

OFFICIAL ASSIGNEE v SMITH AND PERKINS [2013] NZHC 3217 [29 November 2013]

in this proceeding contains four causes of action. The default judgment related to the first three causes of action, all of which were based in contract and the judgment which resulted was for a total sum of $1,597,848.

[3]      The Official Assignee now seeks judgment on the fourth cause of action.  It supplies the means to enforce the default judgment against the property of the Trust.

The factual background

[4]      Sometime ago Mr Perkins and his brother were the joint administrators of their mother’s estate in the United Kingdom.  In breach of his fiduciary obligations Mr Perkins sold properties belonging to the estate.  He retained the proceeds.  These were remitted to New Zealand.  In due course, his brother sued Mr Perkins in the United Kingdom.   He obtained judgments.  These were subsequently registered in New Zealand.

[5]      In the meantime, Mr Perkins was the settlor of the Trust established in 2001. He was also a trustee of the Trust and a short time after it was established his partner, Ms Smith, became a trustee as well.  That remained the situation until August 2011, when Mr Perkins retired as a trustee and his son Oliver Perkins was appointed in his stead.

[6]      The Bay of Islands Trust is a discretionary one.  The settlor, Mr Perkins holds the power to appoint income, while the final beneficiaries who are entitled to capital, are Ms Smith, Oliver Perkins and a step-daughter of the settlor.

[7]      Following the establishment of the Trust in 2002 it purchased two properties. Both properties were in Kerikeri.   The first was purchased for $925,000, and the second  for  $340,000.    The  purchase  price  in  each  instance  was  advanced  by Mr Perkins to the Trust, interest free, but without any defined date for repayment of the advance. Nor was there a term that the advances were repayable on demand.

[8]      In addition, between 2001 and 2006 Mr Perkins made various cash advances to the Trust.   The two property related advances and the various cash advances formed the basis of the three causes of action to which I have already referred.

Financial  statements  of  the  Trust  to  31  March  2010  were  available  to  the Official Assignee.  These disclosed a balance due to Mr Perkins of $1,597,848 as at March 2010.  From the books of the Trust it was evident that this figure represented the balance outstanding of the total advances after amounts had been forgiven from year to year, and also after allowance was made for part repayments of the debt made on a periodic basis.

[9]      The breakdown in relation to the three causes of action was taken from the records  of  the  Trust.    The  outstanding  balance  in  relation  to  the  first  property purchase was $763,000, while the full purchase price of $340,000 was outstanding in relation to the second purchase, together with a figure of $494,849 in relation to miscellaneous cash advances.  The total of these three figures represents the amount of the default judgment before costs and disbursements.

[10]     Finally, I note some relevant developments in 2011.  That year, Mr Perkins brother commenced bankruptcy proceedings in New Zealand based on the judgments previously obtained in the United Kingdom, which he had registered here.   On

17 August 2011 Mr Perkins resigned as a trustee of the Trust and Oliver, his son, was appointed.  This was effected by a deed of retirement and appointment.  Nine days later on 26 August 2011, Mr Perkins was adjudicated bankrupt.

[11]     On 10 January 2013 the then trustees of the Trust passed a resolution which purported to reinstate Mr Perkins as a trustee.  I shall return to the validity of this resolution shortly.

[12]     On 17 January 2013 there was a meeting of creditors which also doubled as the occasion for an examination of Mr Perkins.  A major assertion which he made in the  course  of  giving  evidence  under  examination  was  that  the  amount  of  over

$1,500,000 shown as owed to him in the financial statements of the Trust was in error.  Mr Perkins asserted that this sum was owed to the Perkins Trust, a U.K. Trust. He explained his philosophy to not own property in his personal capacity, rather to vest property in trusts.

[13]     That assertion is, in my view, unbelievable.  Three factors prompt that view. Firstly,  the  assertion  is  at  odds  with  the  books  of  the  Trust  and  its  financial statements.  Secondly, Mr Perkins’ credibility must be regarded as impaired, given his conduct in the United Kingdom, his actions in remitting funds to New Zealand and then immediately utilising them through this Trust.  Thirdly, the context cannot be ignored.   This was an examination in the context of his bankruptcy when Mr Perkins  obviously  knew  that  the  Official Assignee  was  concerned  to  trace  and recover any personal property of the bankrupt for the benefit of creditors.

[14]     For these reasons, I place no weight on the assertion made in the course of that examination.

The fourth cause of action

[15]     As  previously noted the focus  of the remaining cause of action  is  upon enforcement of the default judgment obtained by the Official Assignee.  He, standing in the shoes of Mr Perkins in his personal capacity,  now seeks to enforce that judgment. The relief sought in relation to the fourth cause of action is:

(a)      A declaration that the first and third defendants are the current trustees of The Bay of Islands Trust.

(b)A declaration that the property of The Bay of Islands Trust stands charged in favour of the plaintiff to the extent of $1,597,849 (plus such interest and costs as awarded) and that the plaintiff is entitled to discharge the indebtedness out of the property of The Bay of Islands Trust.

(c)      An order in equity that property of The Bay of Islands Trust be sold to satisfy the plaintiff ’s charge on such terms and conditions as the Court considers just and equitable.

(d)      Any such other order the Court considers appropriate.

[16]     It is necessary to consider the legal basis of the relief sought.  A number of steps are involved.  It is convenient to address these three questions.

(a)       Who are the current trustees of the Trust?

(b)Standing in the bankrupt’s shoes, can the Official Assignee in reliance upon Mr Perkins’ right of indemnity as a former trustee of the Trust enforce  the  default  judgment  against  the  property  of  the  Bay  of Islands Trust?

(c)      If so, is an order for sale appropriate, and what terms and conditions are just and equitable?

I shall consider these questions under similar headings, although a number of issues arise in relation to the second question, in particular.

Who are the current trustees?

[17]     To recap, the long term trustees were Mr Perkins and his partner Ms Smith. On 17 August 2011, however, a deed of retirement and appointment was signed. Mr Perkins appointed his son Oliver, and also retired himself.  The deed complied with the requirements of the trust deed.   Mr Perkins as settlor held the power of appointment of trustees  and he exercised it as  was stipulated in the trust deed, namely by a deed of appointment.1

[18]     On 10 November 2012 the then trustees by resolution purported to reinstate Mr Perkins as a “full trustee” of the Trust.  Mr Perkins signed the resolution as the “reinstated trustee”.  This appointment however, is clearly invalid and of no effect. Mr Perkins remained the appointer of trustees.  It was not open to the then trustees to pass a resolution of this kind, nor was it competent to endeavour to change the trusteeship of the Trust by resolution as opposed to a deed.

[19]     I make a declaration that Ms Janet Smith and Oliver Perkins are the trustees of the Bay of Islands Trust.

1      Clauses 17.1 and 17.7.

Is the property of the Trust charged with payment of the judgment debt?

[20]     This issue requires some mental agility.  The judgment debt obtained by the Official Assignee relates to an amount owed to Mr Perkins in his personal capacity at the time of his adjudication.   The right to recover the amount advanced from the Trust was likewise personal property of the bankrupt, which vested in the Official Assignee.    He,  standing  in  Mr  Perkins’  shoes,  sued  and  obtained  the  default judgment.

[21]     But, whether the Official Assignee can effect recovery against the property of

the Trust hinges on Mr Perkins’ rights as a trustee.  The advances between 2002 and

2006 were made by Mr Perkins personally to himself and Ms Smith in their capacity as trustees.  Ms Smith alone was sued, and the judgment for $1,597,848 is against her.    She  can  seek  indemnification  from  the  Trust,  but  the  Official Assignee’s concern is whether Mr Perkins can also do so.   If so, the right of indemnity also vested in the Official Assignee on adjudication.

[22]     In this event, the Official Assignee acquired not only Mr Perkins’ right to recover the advances, but in addition his right to be indemnified from the Trust assets as well.

[23]     Mr Neil submitted that issue estoppel applied on account of the judgment against Ms Smith.  But I see no need to have recourse to that doctrine.  Mr Perkins was not a trustee at the date of his adjudication.  He had retired, nine days earlier. But there can be no question he was a trustee when all of the advances were made between 2002 and 2006.  In fact, he made them in one capacity and jointly received them in another.

[24]    It follows in my view, that both he and Ms Smith acquired a right of indemnification when each advance was received by them.  The trust deed provided as  much  in  relation  to  “any  liability  incurred  for  the  benefit  of  the  Trust”.2

Section 38(2) of the Trustee Act 1956 provides a statutory right to an indemnity as

2      Clause 21.3.

well.   Moreover, that right was retained by Mr Perkins upon his retirement as a trustee.3

[25]     Accordingly, on adjudication this right vested in the Official Assignee as property of the bankrupt:  s 101(1)(a) of the Insolvency Act 2006.  There can be no question that the advances were liabilities properly incurred.  The first two were used to pay for the Kerikeri property purchases.  What the further advances were used for is not a matter of record, but the books and financial statements of the Trust duly record the receipt of the various amounts and any subsequent repayments made to Mr Perkins (in his personal capacity) as well as amounts (typically $27,000) forgiven from year to year.

[26]     These repayments, I note, affect the limitation period. Although six years had passed  before  this  proceeding  was  commenced  in  April  2013,  regular  part repayments were made to Mr Perkins until at least 31 March 2010.  These define the point from which the limitation period commenced to run.  In the financial year to March  2010  regular  monthly  and  other  payments  were  made  by  the  Trust  to Mr Perkins resulting in an opening balance recorded in the financial statements of

$1,625,848 reducing to a closing balance of $1,597,848.  Accordingly, Mr Perkins’ right of action to recover the balance due to him was “deemed to have accrued on, and not before, the last payment”:  s 25(4) of the Limitation Act 1950.  The Official Assignee’s proceeding was, therefore, filed well within time.

[27]     Returning to the right of indemnity, does it confer a proprietary interest in the assets of the Trust?  Mr Neil cited a number of Australian and New Zealand cases in relation to this aspect.  In Octavo Investments Pty Ltd v Knight the Court held:4

It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions:  Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: Vacuum Oil Co Pty Ltd v Wiltshire.  The charge is not capable

3      Re Suco Gold (1983) 7 ACLR 873; Rothmore Farms Pty Ltd v Belgravia Pty Ltd [1999] FCA

745;   Official   Assignee   v   Menzies   and   Palmer   HC   Auckland   CIV-2010-404-5457,

14 February 2011.

4      Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; 27 ALR 129.

of differential application to certain only of such assets.   It applies to the whole range of the trust assets in the trustee’s possession except those assets, if any, which under the terms of the trust deed, the trustee is not authorised to use for the purposes of carrying on the business:  Dowse v Gorton [1891] AC

190. ...

[28]     In Re Suco Gold the Supreme Court of South Australia said:5

The trustee’s lien is an equitable lien which confers on him a charge over the trust property, whether in his possession or not, for the purpose of protecting and enforcing the right of indemnity.  It also confers on the trustee a right to possession of the trust property for the purpose of protecting and enforcing the right of indemnity, Jennings v Mather [1902] 1 KB 2. The right of possession of the trustee, until his right of indemnity is exercised, is superior to those of a new trustee or the cestuis que trust.

[29]     Recently, Associate Judge Bell relied on these cases in Official Assignee v Menzies and Palmer,6 a case which also concerned a trustee’s right of indemnity that had vested in the Official Assignee.  I consider such reliance was appropriate and, hence, I follow the Associate Judge’s example.

[30]     For  these  reasons,  I  find  that  the  property  of  the Trust  is  charged  with payment of the judgment debt.  Not only did Mr Perkins’ personal right to recover the advances he had made vest in the Official Assignee on adjudication and, thereby, facilitate the default judgment, Mr Perkins’ right of indemnity also vested in the Official Assignee on adjudication.  This right included a proprietary interest in the property of the Trust by virtue of an equitable lien.

Is an order for sale appropriate, and if so on what terms?

[31]     A trustee’s right of indemnity may be exercised through the sale of trust property.  The trust deed may authorise as much, or absent a power of sale in the deed, a Court order may be obtained.   Clause 21 of the Trust deed provides for a “full and complete indemnity from the Trust fund”, but is otherwise silent.  Here, the Official Assignee seeks an order for sale. This, I accept is an appropriate course, and I make an order that the Official Assignee or anyone authorised to act on his behalf

may sell property of the Trust to satisfy the lien now vested in the Official Assignee.

5      Above n 3.

6      Above n 3.

[32]     However, as Mr Neil explained in the course of his submissions, the only known asset of the Trust is a shareholding in a company, Bay of Islands Investments Limited.    The  trustees,  Ms  Smith  and  Oliver  Perkins,  hold  the  shares  in  this Company and Oliver Perkins is the sole director.  The Company owns property in the United Kingdom which is intended for development.  The Official Assignee seeks the appointment of a receiver to the Trust to identify and realise its assets to satisfy the judgment debt.

[33]     This Court enjoys an inherent equitable jurisdiction to appoint a receiver of an incorporated society, a trust or other like entities, for example, where the body is afflicted by dispute and there is a risk of dissipation of assets.7

[34]     In BNZ v Rowley and Skinner,8 Dobson J appointed a receiver in relation to a trust after the trustees were convicted of criminal dealing and BNZ had obtained judgment against Messrs Rowley and Skinner in their capacity as trustees.   In my view, there are parallels between that case and this one.  Although it is not proved that this Trust conducted dishonest activities, it was established as  a vehicle to receive funds fraudulently obtained by Mr Perkins in the United Kingdom.   The present trustees are close to him.  There is a risk of dissipation.  Assets shown in the books of the Trust have already been sold.  An exercise is required to identify and trace the assets of the Trust.

[35]     In these circumstances, I am satisfied that the appointment of a receiver is appropriate.  The Official Assignee seeks the appointment of Boris Van Delden and Jared Booth, Chartered Accountants of Auckland as receivers.   They consent to appointment and are experienced practitioners in the insolvency field.  The following terms and conditions of appointment are proposed:

(a)       The giving of security in accordance with r 7.61 of the High Court

Rules is dispensed with.

7      Evans v Robertson Orr [1923] NZLR 769; Te Runanganui o Ngati Kahungunu Inc v Scott

[1995] 1 NZLR 250; Public Trust v Conway Madison Group Limited (In Liq) [2012] NZHC

2071.

8      BNZ v Rowley and Skinner [2012] NZHC 3540.

(b)The receivers shall be allowed remuneration as a first charge on the assets of The Bay of Islands Trust at the rates to be approved by the Court upon the filing of a memorandum by the receivers pursuant to r 7.62 of the High Court Rules.

(c)      The receivers be indemnified to the extent of the assets of The Bay of Islands Trust in respect of all liabilities properly incurred by them in the course of the receivership.

(d)      The receivership shall file reports and accounts as required by the

Receiverships Act 1993.

(e)      The receivers are jointly and severally authorised to do any act or thing that the trustees of The Bay of Islands Trust might do, and are empowered to exercise in respect of The Bay of Islands Trust the powers conferred upon liquidators pursuant to ss 261 to 267 inclusive and ss 273 to 274 inclusive of the Companies Act 1993 as if the trust were a company in liquidation and the settlor and the trustees (past and present) were the directors of a company and the beneficiaries of the trusts were the shareholders of a company in liquidation.

(f)      The exercise by the receivers of such powers under those sections of the Companies Act 1993 may be subject to challenge on application to the Court by any person claiming that his, her or their interests are adversely affected by the exercise of such powers.

(g)The receivers are to have the powers to identify, trace and follow assets of The Bay of Islands Trust, and to realise all such assets.

(h)The receivers are authorised to appoint themselves, or other partners or employees of McDonald Vague, as liquidators of Bay of Islands Investments Limited.

(i)       The receivers or the Assignee are reserved leave to apply further.

(j)That the receivers notify the trustees of The Bay of Islands Trust by letter sent by ordinary mail of the order made and the terms of the order.

These powers, terms and conditions are similar to those ordered in BNZ v Rowley and Skinner.  Upon consideration, I consider they are appropriate and also tailored to the circumstances of this Trust.

[36]     Accordingly, I approve the proposed terms and conditions of appointment as well.

Conclusion

[37]     To   summarise,   I   make   a   declaration   that   Ms   Janet   Smith   and Mr Oliver Perkins are the current trustees of the Bay of  Islands Trust, an order authorising the sale of Trust property to satisfy the right of indemnity, and I appoint Messrs Van Delden and Booth receivers of all the property of the Trust upon the approved terms and conditions.

[38]     I record that I am indebted to Mr Neil for the quality and detail of his submissions, particularly given that this was a formal proof and that I did not have the benefit of submissions from other counsel.

[39]     A memorandum as to costs may be filed.

Solicitors:

Meredith Connell, Auckland